Today’s viral pandemic is a human and economic catastrophe. The human side can only be dealt with by scientists and medics. This article will focus on the economic. Those on the lowest rungs of the economic ladder throughout the world are the hardest hit by today’s crisis. They find themselves without jobs, without savings and with limited prospects of employment generally. Cayman is no different.
We don’t typically associate Cayman with suffering, deprivation and the like, but this crisis risks creating exactly that because Cayman has no meaningful social security system and is an economy that is built on basically four pillars: tourism, financial services, medical and the public sector.
Looking first at tourism, the outlook is bleak. Cayman’s borders are closed until at least September. The head of British Airways says that international travel won’t return to 2019 levels until 2023. Imagine for a moment that Cayman doesn’t reopen to tourists this year. Under this scenario, Cayman will likely experience the steepest, sharpest and most eye-popping decline in GDP in its history.
Ministry of Tourism data suggests that tourism spend accounts for approximately 25%-35% of GDP. This could undercount the actual spend as it may miss items such as home rentals, water-sports or tourism tax. If we add the ministry’s estimate of dollars spent with the Economic and Statistics Office accounting of hotels, then it is fair to conclude that 30% of Cayman’s economy comes from tourism.
If tourism is closed for 9½ months, then that implies a shock to GDP of -19%. That’s just tourism, which is not, of course, the only sector suffering. Construction has been closed for two months. Retail has mostly been closed, other than essential services, for two months, and restaurants, bars and other social venues have also been shut.
Wholesale has also suffered from a lack of demand from the construction industry and, of course, property sales are close to zero. Add all that together and that implies a further hit to the economy of up to 5% of GDP.
However, there are positive signs, principally in finance. Anecdotal evidence suggests the hedge fund industry is active. Registrations of new companies and partnerships are strong. The audit and legal industry are also busy. Finance, according to the ESO, accounts for 50% of Cayman GDP. Imagine finance has a strong year and grows by 5%. That means we have half the economy growing at 5% (so contributing to a +2.5% growth in GDP), offset by declining industries knocking off 24% of GDP. The net result of this rosy finance scenario is overall GDP declining by 22.5% in 2020. Imagine, though, that finance isn’t that strong. Plausible reasons to assume this are that banking weakens due to loan-repayment issues. In that scenario, it is easy to foresee Cayman’s GDP declining 25% and perhaps as much as 30% in 2020.
Recall the words now of the British Airways boss and the recovery of the tourism sector will be slow and stuttering. In other words, don’t expect 2021 to be a carbon copy of booming 2019 but rather a better version of staggering 2020.
The message here is bleak but important. The average standard of living across Cayman will take multiple years to recover to where it was before the COVID crisis and, for some, without the right policy approach, it may never recover.
A vision for Cayman
After all the introductory doom, is there a future that is bright, albeit perhaps temporarily hidden from view? The answer to this is a qualified yes. Qualified because it relies on either a lot of things going well for Cayman (and all of those being entirely out of Cayman’s hands) or on aggressive, exceptional and unprecedented policy actions.
The first point to make is that Cayman has already seen some admirable early efforts towards recovery but they lack sufficient scale or impact. The second is that the raw infrastructure of Cayman is very different today to that after Hurricane Ivan. Then, people’s focus was on rebuilding and putting a roof over their heads. Today is very different. People have the ability to turn their attention to new ventures.
Caymanians have four fundamental sources of income: Employment, business ownership, investments or property. Nothing can be done about earnings from investments made – that’s outside of anyone’s hands as we are at the mercy of fickle world markets. Policy can address each of the other areas in potentially meaningful ways. In turn:
Income from property
Property only earns income if people live in it. Cayman’s population has decreased and, with a dearth of tourism and business travel, the rental market is going to be hit hard. That will affect ordinary Caymanians who have for many years invested in property as a source of income. Yet there’s an easy solution to this. Many financial services organisations need new staff. Regulation is increasingly burdensome, cumbersome and bureaucratic, but it is fuelling the need for work and activity in Cayman. How though to meet that need if the Cayman immigration system is closed to foreigners? Cayman needs to lay out a clear and precise pathway for people to relocate to Cayman to work for the local audit, law and financial service firms. This would help absorb some of the excess rental supply on the market and put cash into the hands of locals. If employers need to post a quarantine bond to reassure the public, make it so, but encourage prudent immigration.
Income from employment
For many, there is no employment. This is a problem that will require, at a minimum, the private sector to operate and recruit. It will also require careful messaging. For the last two months, people have been told to “stay home to stay alive”. Changing that message will be difficult but crucial to stimulate demand. Until demand exists for those with no imminent prospect of employment, the government should probably introduce a temporary transparent scheme of support.
As important is a temporary but substantial liberalisation of employment rules in Cayman. Everyone wants to see any Caymanian who wants to work with a job. Political soundbites are not the same as good policy, however; imagine a company that wants to do IT work in Cayman but is restricted from hiring an overseas IT professional or a qualified expat currently unemployed. The result may be the outsourcing of that work to India and that income permanently lost from Cayman. The plan should be to get those people into the workforce: If a person is employed, they then spend money in turn at other shops or on other services in Cayman. That boosts aggregate demand which in turn leads to other companies needing to expand that can then hire Caymanians, and so they would benefit from a liberalisation of the immigration market. It need not be a permanent liberalisation, but getting people working will benefit all Caymanians in the end.
Income for business ownership
This is a tricky one. Other countries have experimented (and early evidence suggests successfully) with workplace loans to fund businesses during these zero-demand times. They help keep otherwise viable businesses going for when the economy reopens. But Cayman is different. A whole leg of the economy is non-viable until the borders reopen. Simply providing funding may not be a workable short-term solution and could rapidly turn into a long-term welfare package or government funding “national champions”; both acts are economically deleterious.
Venture Cayman – a thought experiment
Cayman leads the world in its incredibly low levels of government debt and annual borrowing. Whether by luck, design or direction, Cayman enters this crisis with incredible capacity to use fiscal policy as a tool to energise an economic recovery. Fiscal policy has a habit of eliciting visceral reactions from certain people, perhaps nowhere more so than in a low-tax jurisdiction where it conjures up images of taxation or state-run businesses. Borrowing to fund expenditure or to give handouts to the less-privileged isn’t always a popular activity and, in fact, is often frowned upon by economists.
But these unusual times warrant fiscal activity.
Imagine if Cayman put some of its ‘balance sheet’ to use, borrowed from international investors (remember that interest rates for investment grade borrowers such as Cayman are at ultra-low levels and thus borrowing is an incredibly cheap source of finance) and then used that to stimulate the economy.
Imagine if Cayman borrowed 25% of its annual GDP. This would be close to US$1 billion.
It should undoubtedly use some of that stimulus money to support people in these trying times so that they can afford to pay their necessities and thereby prevent unnecessary and painful deprivation. But that would still leave a huge amount of firepower, untapped and available.
It has been said that a former White House chief of staff swore by the phase, “Never let a crisis go to waste.” That’s exactly what this thought experiment is going to suggest utilising.
If Cayman borrows the aforementioned US$1 billion, it could use the vast majority of that to inject equity capital via a venture fund into entrepreneurialism in Cayman. This fund would need to operate commercially, free from undue government interests, and run in a professional fiduciary capacity for the Cayman Islands. It would help catalyse thoughts that were previously unthinkable, it would help fund ventures that were previously unfundable, and help break entrenched interests that were previously unbreakable.
We have been granted a once-in-a-generation opportunity to evaluate what works and what doesn’t, and make major investments in creating a better, more dynamic, less polluted, more efficient and more productive future Cayman. When else could a master plan for George Town be carried out other than when there are no cruise shippers or tourists to be disappointed by all the construction?
When else could private enterprise be encouraged through venture capital grants to invest in agriculture or aquaculture to provide Cayman with more food security? When else could the road system be re-imagined to reduce cars, encourage cycling and reduce accidents than when the commute is a potential anachronism? When else could government re-evaluate its reliance on 20th century procedures than when a lockdown has shown how inefficient that made us? When else could the walls and barriers to competition be better knocked down than when we need new businesses?
Cayman has the talent, the entrepreneurialism and the spirit to create new industries. Adversity, to coin another phrase, is the mother of invention. Cayman could use fiscal policy to back a Singapore-style national venture fund that would underwrite and invest in entrepreneurs and, in exchange for equity, help finance a revitalisation and invigoration of Cayman’s economy.
Would it be bold? Yes. Would it be risky? Quite possibly. But what other opportunity will present itself for Cayman to re-imagine its future than when faced with the current pandemic? There are problems and issues aplenty that would need to be overcome. But if ever a risk like this was warranted and the reward profile as compelling, it is now, today. Cayman has the talent. Cayman has the opportunity. It should seize the moment.
Simon Cawdery is a member of the CFA Society Cayman Islands. The opinions and views expressed here are those of the author alone.